Types of Credit Facilities: The Complete 2026 IIBF CCP Guide

The different types of credit facilities offered by banks form the backbone of every lending decision in India. And they are one of the highest-yield topics in the IIBF Certified Credit Professional (CCP) exam. Whether a borrower needs a running working-capital line.

A one-time loan. Or a guarantee. The bank packages that need into a specific credit product.

Understand these products and you understand how banks actually lend.

If you are preparing for IIBF CCP in 2026. This chapter rewards you twice over. It is conceptual.

It is logical, and it links directly to real banking. This guide explains the types of borrowers. Who is legally competent to borrow.

The split between fund-based and non-fund-based lending. And every major facility — Cash Credit. Overdraft, Demand Loan, Bills Finance, and Term Loans — in plain, exam-ready English.

What Are the Different Types of Credit Facilities?

The types of credit facilities are the standard products a bank uses to lend money or extend a commitment to a borrower. Each product matches a different business need — short-term working capital. Long-term assets, trade bills, or a guarantee to a third party.

Before a bank can offer any of these. Two questions must be answered. First, who is the borrower?

Second, is that borrower legally allowed to enter a contract? Only after both are settled does the bank decide which facility fits. Let us take them in that order.

Types of Borrowers Eligible for Bank Credit

Banks lend to a wide range of legal persons, not just individuals. The common types of borrowers who are usually eligible for credit from banking institutions are listed below.

• Individual — a single natural person borrowing in their own name.
• Hindu Undivided Family (HUF) — a family unit recognised as a separate borrower.
• Partnership firm — a business run by two or more partners.
• Limited Liability Partnership (LLP) — a partnership with limited liability protection.
• Companies — private or public limited companies incorporated under company law.
• Statutory Corporations — bodies created by a specific statute.
• Trusts and Co-operative Societies — borrowing within the powers of their governing documents.

Each category is treated slightly differently during documentation. Because the people authorised to sign and the security available will vary. But all of them can, in principle, access bank credit.

Who Is Competent to Contract?

One of the essential elements of a valid contract is the capacity of the parties to contract. Before entering into a contract with any person. The bank must ensure that person is competent to contract. This is a legal must, not a formality.

The easiest way to learn who is competent is to learn who is not. Under the Indian Contract Act. The following persons are specifically treated as incompetent to contract.

• A minor — any person below the age of 18 years.
• A person of unsound mind. Someone unable to understand the contract at the time of making it.
• A person disqualified by law — for example. A person who has been declared insolvent.

If a bank lends to an incompetent person. The contract can be void, and recovery becomes legally difficult. That is why capacity is checked first, every single time. For the precise legal wording and any updates. Confirm on the latest official IIBF notification and the bare Act.

Fund-Based vs Non-Fund-Based Lending

Once the borrower is identified and found competent. The credit facilities available fall into two broad categories. This classification is a favourite one-mark question, so commit it to memory.

1. Fund-based lending. Facilities where there is an immediate flow of funds to the borrower. This includes Overdrafts. Bills Finance, Cash Credit accounts, Term Loans, and Demand Loans.
2. Non-fund-based lending. Facilities where there is no immediate outflow of funds from the bank. This includes the issuance of a Letter of Guarantee. A Letter of Credit (LC). For which the bank charges a fee.

The difference is simple but vital. In fund-based lending, the bank's money goes out now. In non-fund-based lending. The bank only promises to pay if something happens. So it earns fee income while carrying a contingent liability.

1. Cash Credit (CC) System

A Cash Credit account, like a current account, is a running account. A debit balance is sanctioned up to the drawing power limit. Which is based on the stock the borrower holds. This limit is generally sanctioned for one year and then renewed. Enhanced or reduced — as per the customer's working-capital requirements.

The borrower must submit periodic stock statements. How often depends on the operating cycle. Turnover, cash budget, or projected balance sheet.

Cash Credit can sometimes also be made available against jewellery. National Savings Certificates. LIC policies.

And other personal assets — in which case stock statements are not required.

Security: Cash Credit is generally offered against hypothecation or pledge of the borrower's prime security. Such as raw material or book debts.

Benefits of the Cash Credit System

• Flexibility: The borrower need not draw the whole amount at once. Can withdraw money whenever the need arises.
• Operative convenience: The borrower can transact in the CC account for normal business activity. So there is no need to open a separate account every time funds are required.

Disadvantages of the Cash Credit System

• Fixation of credit limit: Under a CC account. The limit is prescribed on a yearly basis. Which can be rigid for fast-changing businesses.
• Inability to verify end-use of funds: The bank sanctions the CC limit for a particular use — most commonly working capital — but cannot really verify whether the funds were actually used for the sanctioned purpose.

2. Overdraft (OD)

Under an overdraft. The customer is allowed to draw. Issue cheques over.

Above the balance standing to their credit in the current account. This facility is normally available to customers who hold a current account. Although in some exceptional cases savings-account holders are also allowed to overdraw.

The bank charges a relatively high rate of interest on the daily debit balance. And the overdraft is usually repayable on demand. Banks offer two broad types of overdraft.

• Secured overdraft
• Temporary (clean) overdraft

Temporary overdraft: This is purely personal credit allowed to a customer to help them meet a genuine emergency. If a bank allows a customer to draw against an uncleared cheque. That too falls under a temporary overdraft.

Secured overdraft: This is offered against some tangible security — for example. An LIC policy, National Savings Certificates, bank deposits, or shares. Traders often use it because it provides credit at lower operating cost. Available through a simple application and the required documentation.

3. Demand Loans (DL)

A Demand Loan is a secured loan that is repayable on demand. It is usually granted by marking a lien on instruments such as fixed deposits. LIC policies with adequate surrender value, and National Savings Certificates.

Repayment is flexible. It can be made in monthly. Quarterly.

Or half-yearly instalments. Or as a single lump-sum payment at the end of the credit period. Sometimes the loan is simply closed from the proceeds of the security against.

It was granted.

4. Bills Finance

Bills Finance is a short-term facility. Under it. The bank purchases or discounts the demand bill.

The usance bill from the customer. These bills can also be negotiated by the bank. As in the case of a Letter of Credit.

The main advantage is speed: the seller receives immediate money from the bank instead of waiting for the buyer to pay.

• Demand bills are payable on presentation and can be clean or documentary. Banks generally accept documentary bills for purchase. Though clean bills may be purchased when they are drawn on good parties.
• Usance bills are bills that mature on a future date.

5. Term Loans

A Term Loan carries a long commitment period. With a maturity that can range from about 10 to 15 years. It is typically repaid from the cash generated by the operations of the business.

Term Loans are sanctioned only after a thorough credit appraisal of both the borrower. The project. The bank assesses the borrower's integrity.

Status. Business capacity. Managerial competence, and the amount of personal funds the borrower has invested.

Before sanction. Banks also check credit information reports (such as CIBIL). Promoter declarations, and internal and external credit ratings.

Many other factors are weighed too — competition. The quality and price sensitivity of the product. Terms of sale and after-sales service, technical feasibility, and the production process.

There are further fund-based facilities offered by banks beyond these. Which build on the same principles.

Types of Credit Facilities at a Glance

This comparison table compresses the whole chapter into one screen. Ideal for last-minute CCP revision and for winning featured snippets.

Quick Facts: Credit Facilities for CCP

How to Study Credit Facilities for IIBF CCP

The CCP exam tests how well you can match a borrower's need to the right facility. That is exactly how these questions are framed. Use this simple, high-return study plan.

1. Lock the two-way split first. Fund-based means money out now; non-fund-based means a fee for a promise. Get this and you secure the easiest mark.
2. Group by account nature. Cash Credit and Overdraft are running accounts. Demand Loan and Term Loan are one-time disbursals. This grouping prevents mix-ups.
3. Tie each facility to its security. CC to hypothecation of stock. Demand Loan to a lien on FD/LIC/NSC. Term Loan to project appraisal.
4. Memorise the incompetent persons. Minor, unsound mind, disqualified by law — a near-guaranteed question.
5. Practise application questions. Attempt our mock tests with detailed explanations to turn reading into recall.

Want broader coverage of the CCP syllabus? Our free guides walk through other high-weightage credit and banking topics in the same simple format.

Common Mistakes Students Make

Even well-prepared candidates drop easy marks here. Avoid these traps.

• Confusing Cash Credit with Overdraft. Both are running accounts. But CC is tied to stock/drawing power. While OD is drawing over a current-account balance.
• Calling a Letter of Credit a fund-based facility. An LC and a Bank Guarantee are non-fund-based. No money goes out unless the commitment is invoked.
• Forgetting capacity to contract. Many answers list borrower types. Skip that a minor or insolvent person is incompetent to borrow.
• Mixing up Demand Loan and Term Loan. A Demand Loan is repayable on demand and short. A Term Loan runs for years and funds long-term assets.
• Rote learning without logic. Scenario questions reward understanding which product fits which need — not memorised lists.

Frequently Asked Questions (FAQ)

What are the main types of credit facilities offered by banks?

Banks offer credit under two broad categories: fund-based and non-fund-based. Fund-based facilities include Cash Credit. Overdraft.

Demand Loan, Bills Finance, and Term Loan, where money flows out immediately. Non-fund-based facilities include the Letter of Credit and Bank Guarantee. Where the bank only makes a contingent commitment for a fee.

What is the difference between Cash Credit and Overdraft?

Both are running accounts. But Cash Credit is sanctioned against stock or book debts up to a drawing-power limit. Is usually renewed yearly.

An Overdraft lets a customer draw over. Above the balance in their current account. Is normally repayable on demand.

With interest charged on the daily debit balance.

Who is competent to enter into a loan contract with a bank?

Any person who is of the age of majority. Of sound mind, and not disqualified by law can validly contract. Under the Indian Contract Act.

A minor (below 18 years). A person of unsound mind. And a person disqualified by law (such as an insolvent) are treated as incompetent to contract.

What is the difference between fund-based and non-fund-based lending?

In fund-based lending the bank disburses money immediately. So there is an actual outflow of funds. In non-fund-based lending there is no immediate outflow.

The bank issues a guarantee or a letter of credit. Earns a fee. While carrying a contingent liability that crystallises only if the commitment is invoked.

Are these credit-facility topics important for the IIBF CCP exam?

Yes. Types of borrowers and types of credit facilities are core. High-frequency areas of the Certified Credit Professional syllabus.

Often tested through application and scenario questions. For exact weightage and the current syllabus. Confirm on the latest official IIBF notification.

Conclusion: Turn Credit Facilities Into Easy Marks

The various types of credit facilities are among the most rewarding topics in the IIBF CCP exam. Logical. Practical, and high-scoring once the structure clicks.

Start with the borrower. Confirm capacity to contract. Then map the need to the right product: a running line.

A one-time loan, bill finance, or a non-fund-based commitment.

Lock the fund-based versus non-fund-based split. Group the products by account nature. And revise the comparison table the night before your exam.

Do that, and these questions become guaranteed marks. The CCP exam is conducted by IIBF. So always confirm the latest exam dates.

Syllabus on the latest official IIBF notification at iibf.org.in. Now go make this one of your strongest chapters.

Related Guides

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